The Elephant in the Room

California's fiscal mess continues to worsen thanks to the anti-tax, anti-government policies of the GOP.

When he was governor of California, Ronald Reagan (shown here with his wife Nancy and the Nixons in 1970) increased taxes in order to balance the state budget. Today, that seems impossible.

When Ronald Reagan became governor of California in 1967, he faced a massive budget deficit. But the first move by the man who would become the hero of the Republican Right was not to slash government spending. Instead, Reagan advanced a tax increase in order to balance the state's budget. It was a monster tax hike, too, equivalent to $6 billion in today's dollars.

It was "a sweeping tax package four times larger than the previous record California tax increase obtained by Governor [Pat] Brown in 1959," noted Lou Cannon, a San Jose Mercury News reporter who followed Reagan for several decades. "An economist who analyzed the tax bill without knowing its political background might conclude that it had been crafted by a New Deal Democrat."

Fast-forward 44 years. Upon taking office in 2011, Governor Jerry Brown confronted a similar situation to what Reagan had faced — a revenue-starved government needing to patch holes in its core programs. But in a dramatic sign of how times have changed, the Democratic governor pursued a slash-and-burn agenda far more austere than anything Reagan ever accomplished. Brown's first instinct was not to raise revenues, but to cut $11 billion from medical and welfare spending, decimate higher education, propose closing a quarter of all state parks, and drastically reduce or eliminate other means of state funding to cities and counties.

Shortly after abandoning hope of gaining a few Republican votes for temporary tax extensions — not tax increases — Brown and the Democratic-controlled legislature enacted even deeper cuts to public services, including additional cutbacks to higher education. Assembly Budget Committee Chair Bob Blumenfield of Woodland Hills left little doubt as to what this year's budget means for progressive Democrats: "These cuts will forever haunt our conscience."

Ronald Reagan and Jerry Brown's dramatically different responses to the fiscal hardships they faced provide a powerful example of how the political climate has shifted rightward in the past three decades, at least in terms of taxation and government spending. Since Reagan took office, anti-tax conservatives slowly came to dominate the debate over how our government functions, while progressive Democrats have ceded the political playing field to the point where our public institutions are now looked upon with scorn, as "bloated," as the root cause of our financial woes. Today, Democrats no longer talk about a "Great Society," but instead are left to fight amongst themselves about what to cut — public schools or public-employee pay, libraries or parks, cops or firefighters.

"The Democrats have moved so far to the right that FDR wouldn't recognize his own party," said Gray Brechin, a historian and geographer who leads UC Berkeley's Living New Deal Project, an effort to document legacies of social investments made during the Great Depression.

From the long view of history, it's been a stark transformation. Back in the late-Sixties, Reagan was forced by public expectations about what government exists to do — and by the practical mechanics of how government worked at the time — to retreat from the anti-tax message that propelled him into office. He had no choice but to push for more revenues. The late-Sixties were part of a political era that began during the Great Depression. It was a time in which people believed in the power of government to improve their lives. Voters didn't fear deficits because they understood what was required during economic crises to create a new and better economy — income security, mass employment, and investments in schools, infrastructure, and new technologies.

"Citizens were far less opposed to taxation," Brechin noted. "They saw it coming back to their communities in all sorts of useful things built by the Works Progress Administration, California Conservation Corps, and Public Works Administration — things like [community] swimming pools, schools, parks, roads, airports, and sewage systems."

As a result, Reagan was forced by the politics of the time to find a way to fund education, roads, health care, parks, and universities — not cut them. Californians back then valued government and the services it provided, and more importantly they understood how damaged their communities would become if funds ran out.

But in the decades since, the anti-tax, anti-government message that began with Reagan has gradually taken a stranglehold over the state's political discourse and how government operates. And thanks to ballot propositions pushed by the anti-tax movement, state lawmakers are now constrained by vote requirements that make it nearly impossible to raise revenues in a progressive way. Plus they're handcuffed by a labyrinth of funding mandates and formulas that provide little flexibility in crafting fiscal policy.

And so, California, no longer able to raise revenues to fund even the most basic services, now spends less money per capita on governing itself than at any time since Reagan was in the governor's office. And yet despite the drastic shrinking of government and the increasing number of state residents who call themselves Democrats, the anti-tax conventional wisdom remains stronger than ever. So much so that Sacramento's perennial budget crisis, like the one in Washington, is viewed through a profoundly conservative lens: "Big Government" is to blame. And politicians, on both the right and left, often parrot the same message: The only "fiscally responsible" solution is to make cuts, lots of them.

As for doing what Reagan did in 1967 — push a large tax increase to fix a massive budget deficit — that now seems impossible.

How did it come to this?

It's cliché to say that conservatives are "tougher" than liberals. And yet over the past several decades, there's little doubt that the Right has steadfastly persevered with its anti-tax doctrine despite convincing evidence that its theories have worsened California's economic outlook. Meanwhile, the Left slowly abandoned its pro-government principles despite proof that its ideas helped the economy grow.

Indeed, even while Reagan caved to progressive fiscal ideals still dominant in the late-1960s, the core pro-corporate, anti-government message of his backers — a group of ultra-conservative auto dealers, real estate magnates, and oil tycoons — advanced over time, winning numerous legislative and electoral victories, lowering taxes and starving government of revenues. Liberals, by contrast, essentially stood by and allowed it to happen, historians and political observers note.

"No [Democratic] leader made the public case that these were tax cuts for the wealthy and the corporations, and that they were shifting the burden of taxation to homeowners and individual workers," noted Jeffery Lustig, a founding member of the California Studies Association, and professor of government at CSU Sacramento.

Instead, Democrats like Brown have retreated to a position that is to the right of the early Reagan. Party leaders now reflexively advance budget cuts, lacking the political will or — thanks to constitutional reforms sponsored by conservative activists — often lacking even the legal ability to progressively tax, prudently borrow, and consistently spend money on schools, housing, and medical care, to say nothing of creating jobs for California's working families.

It's a dynamic that author Chris Hedges has diagnosed as "the death of the liberal class." Leftist Democrats who used to serve as a counterbalance against the Right have all but disappeared from the halls of power, replaced by "centrist" and "fiscally responsible" neoliberal politicians resembling Bill Clinton.

California led this national political shift to the right on fiscal issues. Brechin believes that state Republicans have simply been more effective over the years in using propagandistic mass media to sell their message and mold the public discourse, thereby ensuring corporate control over the levers of government. It's an increasingly popular thesis, and some research has pointed out how resource-rich and focused the Right has been in funding ideological campaigns and media-savvy spokespersons — for example, through the recent investments by the billionaire Koch brothers in the Tea Party.

And yet one of the basic messages of the Right — that government spending is out of control — does not comport with the facts. "The facts in California are that spending has been cut by $15 billion in the last three years," said Jean Ross, director of the California Budget Project. "In the budget that the governor vetoed [last month], state general fund spending, the pot of money that pays for health care and education, and where the deficit exists, would be at its lowest level as a share of the economy since the mid-1970s."

The Brown administration's budget proposal released in May noted that general fund spending for the coming year would be "at its lowest level since 1972-73," the mid-point of the Reagan era in California when an average of 5 cents per every dollar of each resident's income funded state government. Reagan actually oversaw an increase in this ratio. By 1976, the state was spending 6 cents per every dollar of individual income. The first incarnation of Jerry Brown — the "Governor Moonbeam" who fought for some progressive policies — boosted this figure to a high of almost 7.5 cents until it was brought down to an average of about 6.5 cents under successive governors. In other words, any further reductions in tax revenues today would actually constitute a record gutting of the state government and bring us back to a pre-World War II version of California when there was far less public investment in education, infrastructure, and health.

Although there's truth to the charge that some public-employee compensation and retirement packages in California have become unsustainable over the past few decades, and that the costs of some state government programs have grown faster than inflation in years past, it's also true that politicians, especially California's, have been irresponsible with fiscal surpluses, historians and political observers note. Too often, extra revenues have been squandered with tax cuts and rebates that outlasted the booming economic times that produced them, leaving the state drained of funds and fiscally handicapped when conditions turned sour. In short, California's rainy day fund has been too small, while the political pressure to rebate taxes (thereby effectively shrinking government) in fat years has grown increasingly more powerful.

Fred Block, a UC Davis sociologist who has been studying California's economy for decades, argues that history shows that despite the Right's message about government spending hurting the economy, the facts, again, prove otherwise. State government has been pivotal, he noted, in fostering California's economic dynamism and prosperity by taxing progressively and making large investments in education and other services. This relationship is in opposition to the Right's notion that taxes and government spending harms the private sector. Block calls this the "Myth of the Vampire State."

"The truth is that — as in the past — higher taxes and higher public spending are the key to future prosperity," Block continued. "California's prosperity over the last three decades was rooted in the spectacular productivity of Silicon Valley, the earnings of the LA-based entertainment industry — movies, TV, music, and video games — and dramatic growth in biotechnology firms. All three of these growth centers were themselves extremely dependent on the state's investments, going back to the 1950s."

And the consequences of eliminating these types of investments, as the Right has slowly and successfully done, promise to be severe. "The opportunity to make California a national leader in green technologies will be lost without renewed investments in higher education," Block warned. "If we keep listening to the right-wing's anti-tax ideology, the state will experience a long, fast, downward slide."

Former Sacramento Bee editor Peter Schrag has given this downward slide ­— which the state has already endured for several decades — a name: "Mississippification."

If spending isn't out of control, what about taxes? According to Ross' organization, the nonpartisan California Budget Project, California is a "moderate" tax state. A recent comparison conducted by the project explained that "in 2009-10, California ranked 15th among the 50 states with respect to state taxes as a percentage of personal income," and that California "also ranked 11th with respect to ... the broadest measure of state and local revenues raised by state and local governments in 2007-08."

When one compares California's taxes to other nations, prosperous ones like Germany and the Netherlands, even accounting for federal taxes, the situation is quite simply that corporations and the wealthy here pay far smaller shares. "A lot of people say California's government is 'broken,' but it's not broken for everyone," Lustig noted. "The wealthy and corporations are making windfall profits through the current system."

Block pointed to a failure of progressive politicians to speak the truth and expose the current tax and budget inequities. "No public leader has really explained that California's great economic success was rooted in high levels of public investment in education, infrastructure, and urban amenities. While Democratic politicians occasionally resist right-wing demands for across-the-board cuts, they have failed over the years to challenge directly the anti-tax obsessions of the Right. If we want a society that takes care of the ill, the elderly, and the poor, and that also invests in the future, we are going to have to raise more money through the tax system at both the federal and the state level."

But when tax increases have appeared on the ballot, it's usually only after bone-deep cuts. In addition, the tax proposals usually lack the progressive tint of years past. Case in point: Brown's plan to extend some higher tax rates relied in part on sales taxes and a higher vehicle licensing fee — regressive measures that unfairly harm low- and middle-income workers.

Public polling, meanwhile, reveals a wide disconnect between Sacramento politicians and the public. Polls have repeatedly shown that Brown's regressive tax proposals stand no better than a fifty-fifty chance of winning. At the same time, polls consistently have revealed that a proposal that Brown has not dared to make — a tax increase on the wealthy — has a good shot at passing. Earlier this year, 62 percent of likely voters in a Public Policy Institute of California poll supported raising the top rate of the state income tax paid by the wealthiest to maintain K–12 education funding. This same type of proposal has consistently been supported by about two-thirds of likely voters since at least 2005. In 2004, a supermajority of voters approved Proposition 63, the Mental Health Services Act, which added a 1 percent surcharge to incomes in excess of $1 million, raising hundreds of millions in revenues, hugely increasing mental health services through capital investments and staff. Other signs abound that most Californians support progressive tax increases when revenues plummet.

So why aren't Democrats pushing for progressive taxes, too? Lustig said he thinks the governor is "acting responsibly" by trying to squarely raise the issue of taxes, "but he's doing so on narrow ground, ground he himself helped narrow by abdicating on Prop 13 years ago."

Proposition 13 was, in fact, the beginning of a profound narrowing of lawmakers' abilities to respond to revenue shortfalls with progressive measures.

Proposition 13 and other anti-tax measures that the Right has successfully written into what policy scholars call the "fiscal constitution" of California have forced local and state officials to seek funds from mostly regressive sources during hard economic times. A plethora of fees has overtaken us in everything from automobile registration to university attendance. And this jury-rigging of the system in favor of regressive taxes has had the insidious effect of further undermining public support for government.

"It's well understood that California's fiscal constitution includes numerous restraints on the legislature's and governor's power to engage in tax and spending decisions," noted David Gamage, a law professor at UC Berkeley. "Proposition 13 is the most notable example of voters using initiatives to shape California's fiscal constitution."

When they set about to pass Prop 13 in 1978, the right-wing activists behind the measure had learned from previous unsuccessful attempts to gut the state's progressive tax system. Rather than trying to rewrite broad sections of the entire tax code (as was attempted in 1973 with Proposition 1, a confusing anti-tax measure drafted by conservative economist Milton Freidman and a John Bircher named Lewis Uhler that was nearly as long as this article), Prop 13's language was kept short and sweet. It simply capped property tax at 1 percent of assessed value and prevented increases of more than 2 percent per year until a property was sold. Its second basic rule, also sold to the voters as a simple, common-sense reform, was to require that all future tax increases be approved by a two-thirds vote of the legislature, and local taxes approved by two-thirds of voters.

But by placing such a steep constitutional barrier on raising property taxes, Prop 13 created intense pressure to increase other taxes, such as sales taxes, causing the state's revenue stream to become both more regressive and more volatile. Linking state and local governments' budgets to consumption taxes also meant that revenues would rise and plummet wildly with the booms and busts of the economic cycle.

Through the two-thirds vote requirement, Prop 13 endowed a small minority of right-wing state legislators with veto power over tax measures. It also gave them a potent bargaining chip to use on virtually all other legislation. This is why in the just concluded budget negotiations, Republican legislators were not afraid to demand that Brown weaken California environmental laws in favor of corporate polluters as a price for getting their votes.

Prior to 1978, local governments funded many public services with property taxes they raised and lowered themselves. Prop 13 (along with a school-funding equalization decision by the state Supreme Court, Serrano v. Priest) ended this arrangement. Afterward, California was forced to fund schools and most other functions of local government with revenues raised mostly through Sacramento, and these revenues were now limited by Prop 13's strictures.

Ironically, then, the much-ballyhooed "conservative measure" effectively centralized power and finances, rather than keeping power in local communities. Lustig believes this centralization of budgets and taxes further empowered the far-right, because it became harder for taxpayers to see a connection between the taxes they pay and the services provided in return. "People ceased to see the local process of decision-making and local results," Lustig explained. "They became ripe for the Republican line that taxes were tantamount to extortion."

Prop 13 and other anti-tax measures also have shifted the burden of funding government from corporations to the middle class. "There's been a redistribution of wealth within the state," Lustig noted. "Global pressures and competition caused some of the loss of income, jobs, and revenue. But it was Prop 13 and subsequent revenue and spending limits, and tax loopholes for the corporations that are most responsible."

The California Tax Reform Association has pointed to the numerous loopholes written into Prop 13 affecting how ownership of commercial real estate is defined as the chief reason why corporations have been able to dramatically reduce their property taxes for decades now. According to Lenny Goldberg and David Kersten, authors of System Failure: California's Loophole-Ridden Commercial Property Tax, a data-heavy research report, "in virtually every county in the state, the share of the property tax borne by residential property has increased since the passage of Proposition 13 in 1978, while the share of the property tax borne by non-residential property has decreased." In Alameda County, for example, assessor data describes a shift between 1973 and 2010 in which the overall share of property taxes paid by residential owners increased by nearly 20 percent while commercial real estate's share decreased 20 percent.

Even in communities where there is strong support for increased funding for schools, parks, and other services, Prop 13's constraints to the fiscal constitution set the stage for increasingly bitter squabbles between otherwise natural allies. Teachers, parents, public-employee unions, neighborhood groups, nonprofits, environmentalists, librarians, social workers, seniors, youth — groups that would normally make up a progressive majority — have instead been pitted against one another in a fight over a shrinking pot of money required to fund community needs. To paraphrase a famous quote, "We are all drowning in the bathtub now."

In Oakland, arguably one of the most liberal cities in the nation, the city council and mayor have had their agenda set for them by the lack of revenue coming from Sacramento. Prevented from closing the budget gap through a focused adjustment of taxes on the $41 billion stock of city real estate in Oakland, the council and mayor have little choice but to push regressive measures, like a parcel tax, once public-employee unions agreed to make significant concessions. Parcel taxes, such as the one pushed by Mayor Jean Quan, generally require each property owner to pay the same amount for each lot, regardless of its market value or the owner's ability to pay. An $80 per year, five-year tax increase like this will be an annoyance to most middle-class homeowners, and probably just a gnat-sized raise for most commercial property owners. But it will be a substantial tax hike for low- and fixed-income homeowners — people who can afford it the least.

Had Prop 13 never passed, and had the property tax system become more progressively flexible instead, Oakland's leaders, using a constitutional authority and discretion they currently don't have, could raise the property tax rate for owners of real estate that is valued in excess of $5 million by just one-tenth of 1 percent, thereby raising millions to fund parks, police, fire, and libraries, without any cuts. Because of Proposition 13 and other constraints written into the fiscal constitution, however, the best Oakland's leaders can offer is an $80 parcel tax, or even worse, a sales tax.

"Without major reforms to either California's tax base structure or to the state's fiscal constitution, we should expect repeated budget crises over the coming decades," wrote Gamage in a 2008 collection of academic articles about Prop 13. "If current trends continue, these budget crises are likely to become increasingly severe. Californians may end up looking back on their current budget troubles with nostalgia."

Asked recently about this appraisal, made just at the outset of the Great Recession, Gamage said, "I stand by this," but "I wouldn't have predicted in 2008 that this downturn would have lasted so long. Because this recession is lasting atypically long, there's ways in which it's significantly worse than I would have predicted."

Gamage painted a gloomy but realistic picture, one that doesn't line up with assumptions being made in Sacramento today. "All the trends that indicate future downturns will be increasingly severe are continuing apace."

When asked recently at a business symposium whether California is "fundamentally flawed," and "if we have the tools to fundamentally fix California's fiscal system," Governor Brown retreated in the same fashion that has failed progressives for decades now, saying in the post-Prop 13 neoliberal style, "I get very wary when we talk about fundamental and fundamentalism." Brown offered instead praise of incremental change, concluding: "We don't change the body politic in a fundamental way."

But based on the current bleak economic situation, it's clear that California's fiscal constitution doesn't work for those who need it most. It is fundamentally broken for the poor and middle class who have been saddled with a greater burden of funding an increasingly emaciated government.

In the 33 years since Prop 13, dozens of similar propositions have been drafted and sponsored by various right-wing lobbies to further cut taxes and shrink local and state government through changes to the fiscal constitution. Many more ballot measures, sponsored by everyone from teachers' unions to environmental groups, have sought to create special taxes and impose complex funding mandates and formulas upon Sacramento, thereby skirting fundamental reforms, and causing increasingly worse gridlock.

It's obvious that Californians are fed up, but most of the "reforms" have only made things worse. Just last year, voters approved Proposition 26, which rewrote sections of the tax code to make it harder for the state and local governments to raise regressive fees by requiring that they need the same two-thirds vote as taxes under Prop 13. Voters are clearly unhappy with these fees, but the measure promises to make it only more difficult to run the state.

On the other hand, last year also saw victory for Prop 25. Prevailing over an opposition funded by big oil, tobacco, and real estate companies, and coordinated by the anti-tax Howard Jarvis Taxpayers Association, Prop 25 dismantled a small part of the Prop 13 bulwark: the requirement that budgets be approved by a two-thirds vote of the legislature.

But it's not much of an advance, as the budget battle this year has proven. Prop 13 still allows a tiny minority of Republican state legislators to hold up the process and eliminate entire budget alternatives if they involve tax increases, or even tax extensions, which any realistic budget must do in times of massive deficits.

Attacks against some of the biggest corporate tax loopholes also have been advanced. Brown and the legislature recently closed the sales tax loophole for online retailers like Amazon.com (they were able to do it because it didn't require any votes from the Republican minority). Some legislators also have brought forward proposals for an oil severance tax. There are even discussions in some circles of attacking Prop 13's biggest loophole head-on with a "split roll" that would allow commercial holdings to be assessed and taxed at different intervals and rates than residential property.

But to advance and win these reforms will take something California hasn't seen since the days of Ronald Reagan: progressive backbone and leadership within the Democratic Party to fight and win on a fundamental level.

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